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(NOLCO)SPECIAL ALLOWABLE ITEMIZED DEDUCTIONSSpecial deductions are other items of deductions which may or may not partake the nature of an expense, but are allowed by the NIRC or by special laws as deductions. Special deductions include deduction incentives to taxpayers in assisting and in complying...

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SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS Special deductions are other items of deductions which may or may not partake the nature of an expense, but are allowed by the NIRC or by special laws as deductions . Special deductions include deduction incentives to taxpayers in assisting and in complying with certain legal requirements. Special Allowable Deductions A. Special expenses under the NIRC and special laws 1. Income distribution from a taxable estate or trust 2. Transfer to reserve fund and payments to policies and annuity contract of insurance companies 3. Dividend Distribution of a Real State Investment Trust ( REIT ) under RA 9856 4. Transfer to reserve funds of taxable cooperatives 5. Discounts to Senior citizens under RA 9257 6. Discounts to persons with disability under RA 9442 B. Deductions Incentives under special laws 1. Additional compensation expense for senior citizen employees under RA 9257 2. Additional compensation expense for persons with disability under RA 7277 , as amended by RA 9442 3. Cost of facilities improvements for persons with disability in accordance with RA 7277, as amended by RA 9442 4. Additional training expense under the RA 8502 – Jewelry Industry Development Act 1998 5. Additional contribution expense under the Adopt-a-School program under RA 8525 6. Additional deductions for compliance to rooming-in and breast-feeding practices under RA 7600 , as amended by RA 10028 7. Additional free legal assistance expense under RA 9999 8. Additional productivity incentive bonus expense under RA 6971 SPECIAL EXPENSES UNDER THE NIRCOR SPECIAL LAWS INCOME DISTRIBUTION MADE BY TAXABLE ESTATES OR TRUST Income distribution made by the administrator of a taxable estate in favor of the heirs or by trustee of a taxable trust in favor of the beneficiary of the trust is a special deduction against the gross income of the estate or trust. The income distribution shall be included by the recipient heir or beneficiary in his gross income. Illustration Don Mariano transferred a commercial lot and a P1M stock investment in irrevocable trust in favor of his son, Ritchie. The trust earned the following income in 2020:

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

Rent income on the lot Less: Leasing Expenses Rental net income Dividend Income, net of final tax Trust net income

P 1,200,000 200,000 P 1,000,000 36,000 P 1,036,000

In accordance with the trust indenture, the trustee distributed half of the gross rentals and the entire dividends to Ritchie. Special deductions The special deductions is P600,000 , the half of the gross rentals given to Ritchie . The distribution of the P36,000 dividend to Ritchie shall not be deductible as this is not included in the gross income of the trust for purposes of the regular income tax. The net income of the trust be computed as follows: Gross rent income Less: Regular allowable deductions Special allowable deductions Income Distribution to beneficiary Net income

P 1,200,000 P 200,000 600,000

800,000 400,000

NET TRANSFER TO RESERVE FUND AND PAYMENTS TO POLICIES AND ANNUITY CONTRACTS OF INSURANCE COMPANIES Under the Insurance Code, non-life insurance companies are required to maintain a reserve equivalent to 40% of their gross premium, less returns and cancellations for risks expiring within one year. For marine cargo risks, the reserve so equivalent to the amount of premium on insurance during the last two months of the calendar year.

The net addition, if any, required by law to be made within the year to the reserve funds and the sums, other than dividends, paid within the year on policy and annuity contracts may be deducted from the gross income of insurance companies. Under current regulations, the transfer to the reserve fund shall be deductible in the year it was actually paid and not in the year it was determined . Also, in consonance with the tax benefit rule, the release of the reserve is treated as an income in the year of release Illustration The following relates to the performance of an insurance company:

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

2018 Premium Revenue Premiums ceded Claims expense Commission expense Administrative expenses Required legal reserves

P

2,100,000 420,000 200,000 100,000 300,000 672,000

P

2019

2020

3,000,000 600,000 800,000 300,000 350,000 960,000

P 2,500,000 500,000 1,000,000 250,000 340,000 800,000

Required: Determine the special deductions and the net income assuming that the required transfers to the reserve funds were made in the same year.

Solution: The net amount which will be paid to or released from the reserve fund is computed as follows: 2018 Required reserves Less: prior year-reserve Amount payable (receivable)

P P

672,000 0 672,000

2019 P P

2020

960,000 P 800,000 672,000 960,000 288,000 (P 160,000)

To simply our illustration, let us assume that the contribution to the reserve were paid in the same year they were determined. The net income of the insurance company shall be computed as follows:

2018 Premium revenue Less: premiums ceded Net premiums Release from reserve Gross income Less: Regular allowable deductions Claims expense Commission Expense Administrative expense Total

P 2,100,000 420,000 P 1,680,000 P 1,680,000

P

P

200,000 100,000 300,000 600,000

2019

2020

P 3,000,000 P 600,000 P 2,400,000 P P 2,400,000 P

P

800,000 300,000 350,000 P 1,450,000

2,500,000 500,000 2,000,000 *160,000 2,160,000

P 1,000,000 250,000 340,000 P 1,590,000

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

Special allowable deduction Payment to reserve Total deductions Net income

P P

672,000 1,272,000 408,000

288,000 P 1,738,000 P 1,590,000 P 662,000 P 570,000

Note: The release of reserve from the reserve fund is included in gross income.

DIVIDEND DISTRIBUTION OF A REAL ESTATE INVESTMENT TRUST (REIT) A REIT is a publicly listed corporation established principally for the purpose of owning income-generating real estate assets. A REIT is legally mandated to distribute 90% of its distributable income as dividends to shareholders. Under RA 9856, the dividend distributions of REITs are treated as special deductions against gross income. For purposes of computing the taxable net income of RETs, dividends distributed by them from their distributable income after the close of taxable year and on or before the last day of the fifth month following the close of the taxable year shall be considered as paid on the last day such taxable year. TRANSFER TO RESERVE FUND OF COOPERATIVES Under RA 9520, cooperatives are required to maintain reserves for their protection and stability. Cooperatives are exempt from income tax, but are subject to tax on their income from unrelated activities. The amount transferred by the cooperative to the reserve fund out of the net surplus from unrelated activities is an item of deduction in the computation of the taxable net income of the cooperative. Illustration Lowland Coop summarized the following income and expenses from its exempt related activities and taxable unrelated activities: Related Act. Sales Cost of sales Gross income Operating expenses Net income

P 2,000,000 1,200,000 P 800,000 P 500,000 P 300,000

Unrelated Act. P 1,000,000 600 ,000 P 400,000 P 150,000 P 250,000

Total P 3,000,000 1,800,000 P 1,200,000 P 650,000 P 550,000

In compliance with the Cooperative Development Act, Lowland Coop appropriates 10% of profit to the reserve fund, plus additional 40% to other required and optional funds.

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

The amount of special deduction and the taxable net income of the cooperatives shall be computed as: Gross sales from unrelated activities Cost of sales Gross income from unrelated activities Less: Regular itemized deductions Net income before statutory reserves Less: Special itemized deductions Appropriation to reserve fund ( P250K x 10% ) Taxable net income

P 1,000,000 600,000 P 400,000 150,000 P 250,000

P

25,000 225,000

Note: Only the appropriation for the reserve fund is deductible as a special expense. The 40% appropriations for other cooperatives funds are not deductible. THE EXPANDED SENIOR CITIZENS ACT OF 2003 (RA 9257) Senior Citizen or Elderly Senior citizen or elderly refers to any resident Filipino citizen aged 60 years old and above. Under RA 9257, A senior citizen or elderly is entitled to 20% discount in certain establishments such as hotels and similar lodging establishments, restaurants, recreational centers and other places of culture, leisure and amusements, hospitals, drugstores, and services such as medical, dental, domestic air, sea and land transport, and funeral or burial service providers. The discounts granted to senior citizens by covered establishments and service providers are allowed as special deductions against gross income.

Conditions for deductibility of sales discount to senior citizens 1. Only that portion of the gross sales exclusively used, consumed, or enjoyed by the senior citizen shall be eligible for the deductible sales discount. 2. The gross selling price and the sales discount must be separately indicated in the official receipt or sales invoice issued by the establishment for the sale of goods or services to the senior citizen. 3. Only the actual amount of the granted or sales discount not exceeding 20% of the gross selling price can be deducted from gross income, net of VAT , if applicable. 4. The discount can only be allowed as deduction from gross income for the same taxable year that the discount is granted. 5. The business establishment giving sales discount to qualified senior citizen is required to keep

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

a separate and accurate record of sales which shall include the name, TIN, ID, gross sales/receipts, discount granted, date of transaction, and invoice number for every sale transaction to senior citizens.

Illustration 1 Goodhealth Drugstore Inc. recorded a P1,200,000 total deductible expense and the following sales : Customerss Regular Senior Citizens P 5,000,000 P 1,200,000 3,000,000 800,000 sssssss

Gross sales Cost of sales

ssssss ss

Goodhealth adopts a policy of giving senior citizens a 25% discount. Consequently, it granted P300,000 total senior citizens’ discounts during the period.

The taxable net income of good health shall be computed as: Gross sales (P5M + P1.2M) Cost of sales (P3M + P0.8M) Gross Income from operations Less: Regular itemized deductions Special itemized deductions Senior citizens’ discount (P1.2M x 20%) Taxable net income

P 6,200,000 3,800,000 P 2,400,000 P 1,200,000

240,000

1,440,000 P 960,000

NOTE: 1. The gross sales to senior citizens must be reported gross of the senior citizens' discount while the discount is presented as a separate expense 2. The claimable senior citizen discount shall not exceed 20% of the gross sales from senior citizens. Hence, the deductible amount is P240,00 not P300,000 Illustration Tasty Restaurants Corporation provides a 20% discount to senior citizens. It recorded the following receipts during the year: Customers

s

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

Regular 4,000,0000

Receipts P Cost of service Other deductible expenses

Senior citizens P 500,000

Total 4,500,000 2,800,000 1,100,000 s

P

The special deduction for senior citizens’ discount and the net income of tasty Restaurant shall be computed as : Gross receipts [P4M + (P500K/80%)] Less: Cost of services Gross income Less: Regular itemized deductions Special itemized deductions Senior Citizens’ discount (P500K/80%) Taxable net income

P 4,625,000 2,800,000 P 1,825,000 P 1,100,000

125,000

1,225,000 P 600,000

Notes: 1. Receipts pertain to cash collection which are inherently net of any discount provided. Hence, the receipts from senior citizens must first be grossed-up 2. The discount must not be deducted out of net receipts. DISCOUNTS TO DISABLED PERSONS (RA 7277) A person with disability pertains to an individual suffering from restriction or different abilities as a result of mental, physical, or sensory impairment to perform an activity in a manner or within range considered normal for human beings. Disability pertains to physical or mental impairment that substantially limits one or more psychological, or anatomical function of an individual or activities of such individuals. Discount to persons with disability Similar to senior citizens, persons with disability are entitled to a 20% discount from certain establishments such as hotels and similar lodging establishments, restaurants, sports and recreation centers, places of culture , leisure and amusements, drugstores on the purchase of medicine, medical and dental services in private facilities , and domestic air, sea and land transport. The discount to persons with disability shall be allowed as a special deduction under the same terms and conditions as those for senior citizens. DEDUCTION INCENTIVES UNDER SPECIAL LAWS

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR SENIOR CITIZEN EMPLOYEES Under RA 9257, private establishments employing senior citizens shall be entitled to additional deductions from gross income equivalent to 15% of total amount paid as salaries and wages to senior citizens. Conditions for deductibility of additional compensation: 1. Employment shall have to continue for at least 6 months 2. The annual taxable income of the senior citizen does not exceed the poverty level as determined by the NEDA The poverty line or poverty threshold pertains to the amount of income sufficient to meet basic food and non food needs such as clothing, housing, transportation, and health among others. The senior citizen shall submit to his employer a sworn certification that his annual taxable income does not exceed the poverty level. Illustration Assume a taxpayer employs both regular and senior citizen employees and paid the following compensation during the year: Regular employees Senior citizen employees with salary grades above poverty level Senior citizen employees with salary grades below poverty level Total compensation expense

P

200,000 50,000

P

40,000 290,000

The total deductible compensation expense shall be: Regular employees Senior citizen employees Regular salaries expense

P P

Additional compensation expense under RA 9257 (P40,000 x 15%)

P

200,000 90,000 290,000 6,000

The 15% additional deduction is definitely not an actual expense, but is allowed by law merely as an incentive for employers who consider senior citizens for employment. The regular salaries will be presented as part of regular allowable itemized deductions. The 15% additional deduction shall be presented as special allowable itemized deduction. Senior citizens who are above the poverty level may avail of incentives under the minimum wage law of they qualify as minimum wage earners.

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

ADDITIONAL CLAIMABLE COMPENSATION EXPENSE FOR PERSONS WITH DISABILITY Private entities that employ disabled persons who meet the required skills or qualifications, either as regular employees , apprentices or learners, shall be entitled to ab additional deduction, from their gross income, equivalent to twenty-five percent (25%) of the total amount paid as salaries and wages to disabled person. Requisites for deductibility: A. The entity present proof as certified by the Department of Labor and Employment that disabled persons are under their employ. B. B. The disabled employee is accredited with the Department of Labor and Employment and the Department of Health as to his disability, skills, and qualifications. The actual salaries shall be presented as part of regular expense shall be presented as special itemized allowable deduction.

COST OF FACILITIES IMPROVEMENT FOR DISABLED PERSONS Under RA 7277, private entities that improve or modify their physical facilities in order to provide reasonable accommodation for disabled person shall also be entitled to an additional deduction from their income equivalent to fifty percent (50%) of the direct cost of the improvements or modifications. ADDITIONAL TRAINING EXPENSE UNDER THE JEWELRY INDUSTRY DEVELOPMENT ACT OF 1998 Under RA 8502 and its implementing rules and regulations, a qualified jewelry enterprise duly registered and accredited with the Board of Investment (BOI) is entitled to an additional deduction from taxable income of 50% of the expenses incurred in training schemes approved by Technical Education and Skills Development Authority (TESDA). The same shall be deductible during the year the expenses were incurred. Conditions for deductibility: 1. A qualified jewelry enterprise must submit to the BIR a certified true copy of its Certificate of Accredited issued by the BOI. 2. The training scheme must be approved and certified by TEDSA. ADOPT-A-SCHOOL ACT OF 1998(RA 8525) Under the Adopt-a-School Program, private entities are allowed to assist a public school in particular aspects of their educational program within an agreed period of time.

SPECIAL ALLOWABLE ITEMIZED DEDUCTIONS & NET-OPERATING LOSS CARRY - OVER (NOLCO)

The adopting private entity which may be an individual in businesses or practice of profession, or asl corporation shall team up with the DepEd, CHED, or TESDA toward providing much needed assistance and services to public schools. The assistance may be an aid, contribution or donation in cash or in kind but not limited to infrastructure, physical facilities, real estate property, training and skills development, learning support, reading materials, computer and science laboratories, health and nutrition packages, and assistive learning devices for students with special needs. Qualifications of participating schools Any government school in all levels may participate in the program. Priorities shall be given to schools located in the poorest provinces, low income municipalities, and other local government units experiencing severe classroom shortages, insufficient budget, or having numerous poor but high performing learners. Qualifications of Adopting Private Entity 1. It must have a credible track record. 2. It must have been in existence for at least one year. 3. It must mot have been prosecuted and found guilty of engaging in illegal activities such as money laundering and others similar circumstances. Tax deduction incentive Contributions to the government in priority activities are deductible in full while those made in non-priority activities are deductible subject to limit. Aside from the usual regular deductible contribution expense, an Adopting entity shall be allowed an additional deduction from gross income equivalent to 50% of the contribution of the Adopting entity for the "Adopt-a-School Program". Contributions for deductibility: A. The deduction shall be availed for in the taxable year in which the expense is paid or incurred. B. The expense is substantiated with sufficient evidence su...